Market Wrap: Futures Unchanged Despite Latest Chinese Rate Cut

With key economic data either behind us (with the downward revised GDP), or ahead of us (the February payrolls on deck), and the Greek situation currently shelved if only for a few days/weeks until the IMF payment comes due and the farce begins anew, stocks are focuing on the widely telegraphed 25 bps Chinese rate cut over the weekend [38], which however has so far failed to inspire a broad based rally either in Asia (where the SHCOMP closed up 0.8% after first dipping in the red) or across developed markets. In fact, as of this moment futures are hugging the unchanged line as the USDJPY attempted another breakout of 120.000 but with numerous option barrier expiration stop at that level, it has since retracted all the overnight gains and is back to the Sundey lows, even as the EURUSD has seen a powerful breakout from overnight lows and is currently at the highest level since the US GDP print, following the release of the final European February PMI data, as a result of USD weakness since the European open.

Look at regional performance, Asian equities traded mostly higher as the PBoC cut its benchmark interest rate. The bank lowered its benchmark interest rate by 25bps to 5.35%, citing deflationary risk and the property market slowdown. It also lowered the 1yr deposit rate to 2.5% and lifted the ceiling on the deposit rate to 1.3x the benchmark rate. Shanghai Comp (+0.8%) and Hang Seng (+0.3%) traded in the green, despite fluctuating between losses and gains, following an initial pessimistic reaction to the central banks’ actions. Nikkei 225 (+0.15%) traded on a caution note, paring back earlier gains following yet another surge to a fresh 15yr high. Chinese HSBC Manufacturing PMI (Feb F) M/M 50.7 vs. Exp. 50.1 (Prev. 50.1); 7-month high. Official Manufacturing PMI (Feb) M/M 49.9 vs. Exp. 49.7 (Prev. 49.8); second consecutive contraction. Chinese Non-manufacturing PMI (Feb) M/M 53.9 vs. Prev. 53.7 (BBG).

The first session of the week sees European equities trade mostly in positive territory in the aftermath of the latest action by the PBoC. This subsequently supported Asian equities overnight, although gains were capped as some participants have concerns over Chinese growth prospects and the timing of the cut, suggesting it may have come too late. Nonetheless, with European news flow relatively light, this has been enough to provide a lift to stocks, with the exception of the CAC which has been dragged lower following earnings from Vivendi. In fixed income markets, Bunds ebbed lower alongside the strength in stocks. Of note, today sees EUR 12.4bln in redemptions from Italy, while peripheral yields have continued to print further record lows ahead of the upcoming launch of the ECB’s bond buying programme.

Also today we got the final Euro area Manufacturing PMI, which came in at 51.0 in February, marginally weaker than the flash estimate. Overall, the area-wide Manufacturing PMI has been stable in February. Improvements in the Manufacturing PMIs for Germany and Italy -- which increased by 0.2pt (to 51.1) and 2.0pt (to 51.9) respectively -- were offset by similar-sized contractions in France (-1.6pt to 47.6) and Spain (-0.6pt to 54.2). While the Italian manufacturing PMI came in 0.8pt above market expectations, the Spanish equivalent undershot expectations by 0.9pt.

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In the US, some are focusing on the latest piece by Fed mouthpiece Jon Hilsenrath [40], who says the Fed’s latest forecast show 9 out of 17 policy makers see the Feds fund rate at 1.13% or higher by year-end. The median estimates point to 2.5% for the end-2016 and 3.63% end-2017. Conversely, Fed funds futures markets expect the Feds fund rate at 0.50% on avg. in Dec’15, 1.35% in Dec’16 and 1.84% Dec’17.

Today we get US personal spending (1330GMT/0730CST) and construction data (1500GMT/0900CST) although these may be delayed today due to the adverse weather in Washington DC.

In FX markets, AUD/USD and NZD/USD were both seen lower overnight ahead of Tuesday’s RBA rate decision, with markets currently pricing in a 58% chance for a 25bps rate cut. This subsequently initially strengthened the USD-index which saw USD/JPY surge to a 2-week high to trade just 4 pips shy of the 120.00 handle, with further moves higher capped by a large vanilla option expiry (1.2bln) at the handle. Nonetheless, the USD-index has come off its best levels throughout the morning amid no new fundamental news, much to the benefit of EUR, leading EUR/GBP higher, although GBP gained back some ground in the wake of the latest UK manufacturing PMI data (54.1 vs. Exp. 53.3).

In the commodity complex, Gold gained overnight with prices supported following the surprise PBoC rate cut over the weekend, while India is also expected to increase its imports of the precious metal despite the government maintaining import duties, as industry participants which were side-lined in anticipation of a cut in duties, return to the market to replenish stockpiles. In energy markets, both WTI and Brent crude futures have traded lower since the get-go following the latest survey data which revealed Saudi Arabia’s output rose +130,000bpd to 9.85mln bpd in Feb; highest since Sept’13. Furthermore, Friday’s Baker Hughes Rig Count which showed a slowing of the rate at which US rigs are becoming idle has also weighed on sentiment.

In summary: European shares little changed with the basic resources and real estate sectors outperforming and health care, food & beverage underperforming. Dollar rises to two-year high vs yuan after China’s second rate cut in 14 weeks. China Feb. HSBC manufacturing PMI above estimates, Euro-area PMI slightly below. Mobile World Congress takes place in Barcelona. The Italian and Dutch markets are the best-performing larger bourses, French the worst. The euro is little changed against the dollar. Japanese 10yr bond yields rise; Portuguese yields decline. Commodities decline, with natural gas, WTI crude underperforming and wheat outperforming.* U.S. Markit U.S. manufacturing PMI, ISM manufacturing, construction spending, personal income, personal spending, due later.

On today's docket, we get the release of US personal income, PCE, manufacturing PMI, construction spending and ISM manufacturing.

Market Wrap:

• S&P 500 futures up 0.1% to 2105.8
• Stoxx 600 up 0.1% to 392.4
• US 10Yr yield up 2bps to 2.01%
• German 10Yr yield up 1bps to 0.34%
• MSCI Asia Pacific down 0.1% to 146.1
• Gold spot up 0.2% to $1215.8/oz
• 66.3% of Stoxx 600 members gain, 31.3% decline
• Eurostoxx 50 +0.1%, FTSE 100 +0.3%, CAC 40 -0.2%, DAX +0.2%, IBEX +0.3%, FTSEMIB +0.6%, SMI -0.2%
• Asian stocks little changed with the Shanghai Composite outperforming and the Sensex underperforming.
• MSCI Asia Pacific down 0.1% to 146.1
• Nikkei 225 up 0.2%, Hang Seng up 0.3%, Kospi up 0.6%, Shanghai Composite up 0.8%, ASX up 0.5%, Sensex up 0%
• Euro up 0.01% to $1.1197
• Dollar Index up 0.03% to 95.32
• Italian 10Yr yield down 3bps to 1.3%
• Spanish 10Yr yield up 3bps to 1.29%
• French 10Yr yield up 0bps to 0.61%
• S&P GSCI Index down 0.4% to 419.4
• Brent Futures down 0.9% to $62/bbl, WTI Futures down 1.3% to $49.1/bbl
• LME 3m Copper up 0.1% to $5903/MT
• LME 3m Nickel down 0.8% to $13980/MT
• Wheat futures up 0.7% to 516.5 USd/bu

Bulletin Headline Summary from Bloomberg and RanSquawk:

• The PBoC cut its benchmark and deposit rates by 25bps each, sending Asian equities higher, although gains were capped as some participants voice concerns over Chinese growth prospects and the timing of the cut
• Fed Watcher Hilsenrath suggests there is a disconnect between when the Fed and market expects the FOMC to hike rates, with the Fed seeing rates at 1.13% on avg. by end of 2015 while markets forecast 0.5%
• Treasuries decline, 10Y holds near 2.00% before personal income/spending and PCE reports and amid expectations for heavy IG corporate calender this week.
• The January reading of the Fed’s preferred inflation measure is likely to be weighed down by a one-time drop in medical care costs, sending a potentially false signal of disinflation that policy makers will probably ignore
• PBOC cut benchmark rates for 2nd time in 3 months, lowering one-year deposit rate 25bps to 2.5%, one-year lending rate to 5.35% as property slump, tighter controls over local government debt and rising capital outflows squeeze growth and liquidity
• Euro-area consumer prices fell less than forecast last month, offering some relief to the ECB  as it prepares to put its unprecedented bond-buying program into action
• Markit’s U.K. PMI rose to 54.1 in Feb, the highest in seven months, from a revised 53.1 in January, median est. for 53.3 in a Bloomberg survey; euro zone PMI 51 last month, unchanged from Jan.
• The Supreme Court is poised to consider a new challenge to Obamacare -- an appeal that has turned a question of how to interpret the statute into a threat to unravel the law; court to hear arguments on March 4, rule by end of June
• Sovereign 10Y yields mostly lower. Asian, European stocks stocks higher; U.S. equity-index futures rise. Crude lower; gold and copper higher

US Event Calendar:

• 8:30am: Personal Income, Jan., est. 0.4% (prior 0.3%)
  • Personal Spending, Jan., est. -0.1% (prior -0.3%)
  • PCE Deflator m/m, Jan., est. -0.5% (prior -0.2%)
  • PCE Deflator y/y, Jan., est. 0.1% (prior 0.7%)
  • PCE Core m/m, Jan., est. 0.1% (prior 0%)
  • PCE Core y/y, Jan., est. 1.3% (prior 1.3%)
• 9:45am: Markit US Mfg PMI, Feb. final, est. 54.3 (prior 54.3)
• 10:00am: Construction Spending m/m, Jan., est. 0.3% (prior 0.4%)
• 10:00am: ISM Mfg, Feb., est. 53.0 (prior 53.5); ISM Prices Paid, Feb., est. 37 (prior 35)

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DB's Jim Reid concludes the overnight summary:

So we march forward towards a busy week which includes the first February estimate for Euro CPI, various global PMIs, an ECB meeting, the China National People’s Congress meeting and payrolls. At the end we'll review February and YTD performance in our usual global asset class review. March has started with a small beat for the China manufacturing PMI (a still soft 49.9 vs. 49.7 expected) but we also have a weekend rate cut to mull over. In terms of the details, the PBOC cut the benchmark deposit rate by 25bps to 2.5% and the one-year lending rate by the same amount to 5.35%, whilst also raising the deposit-rate ceiling to 1.3x from 1.2x. Our China economist Zhiwei Zhang noted that the move was driven by weak economic momentum and falling CPI mainly. He believes that the move probably highlights what will be soft macro prints for the upcoming January and February readings also. Zhiwei also suggests that although the move was in line with his expectations, it’s probably not enough to stabilize the economy and he continues to expect growth to weaken in March (forecasting Q1 GDP of 6.8%). Given the slow policy response and a lack of a meaningful pickup in fiscal spending a softlanding remains a base case, but Zhiwei believes there are rising risks of a mini hard-landing.

Following the China news over the weekend, the Shanghai Comp is +0.31% firmer as we go to print whilst the Nikkei (+0.22%), Kospi (+0.56%), Hang Seng (+0.26%) and ASX (+0.51%) are all higher on the back of the move. Credit markets in China meanwhile are around half a point tighter generally.

Also this morning we've published a quick note showing that February set a new record in the Euro iBoxx non-financial corporate bond market. We've now seen 14 consecutive months of positive total returns beating the run between Nov '08 - Nov '09. For overall corporates (non-fins and fins) February extends its record sequence (again 14) with the previous best being the 10 months from Jun 2000 to Mar 2001. The return on Bunds have been a much bigger component of this run vs. the previous record and with the ECB about to embark on sovereign bond purchases this month we think the pressure to own credit will intensify in an attempt to boost yield. However as iBoxx EUR index yields are now comfortably below 1% for the first time in history it’s seems inevitable that there will finally be some negative total return months ahead. Indeed the effective benchmark Government yield for the iBoxx EUR indices has now gone negative for the first time for both these indices. A remarkable stat. Indeed all-in yields are now so low that for the main broad EUR iBoxx credit indices a move of as little as 1.5-2bps higher in a month will see a negative total return.

We think the market will face a test if and when we get the negative total return month or perhaps two or three within a short space of time. With the lower and lower starting yields the probability of this occurring gets higher and higher. Will flows fall in IG (inflows in 45 out of last 49 weeks) when it sees negative monthly total returns or will it be seen as an opportunity to get higher exposure to a market at a better price? Overall with QE about to start, the shortage of high quality paper will likely continue to keep yields generally low for some time. However with the yield in EUR iBoxx IG indices now completely made up of spread it’s fair to say that we’re more comfortable with further spread compression from this starting point than performance arising from continually lower Government yields. While we’re still positive on European credit spreads for reasons laid out in our 2015 annual ‚Plate Spinning?, we will be watching investor behaviour and flows with interest when we see the inevitable negative total return months arrive. The report should be in your inbox within the last hour. Let us know if you didn't receive it.

Recapping the market moves on Friday, with much of the focus on what was generally a mixed set of macro data releases, the S&P 500 finished -0.30% for its third consecutive day of declines. It was a firmer day for Treasuries however as 2y and 10y yields fell 2.8bps and 3.7bps respectively – the latter back below 2% at 1.993%. In terms of the data, much of the focus was on the revision to Q4 GDP which was revised 40bps down to 2.2% saar, although beating expectations of 2.0% - supported in particular by a pick-up in business investment (+4.5% saar vs. +2.3% previously). Elsewhere, the February Chicago PMI was a notable miss (45.8 vs. 58.0 expected) and down from 59.4 in January. The reading was in fact the lowest since September 2009 and also the largest downside miss versus estimates since data was collected although the suggestions are that weather played a large part. Elsewhere, the ISM Milwaukee (50.32 vs. 54.00 expected) and pending home sales (+6.5% yoy vs. +8.7% expected) also came in below consensus however the final February University of Michigan consumer sentiment reading was revised upwards to 95.4 from 93.6 previously. Fedspeak offered something for both the doves and the hawks. The NY Fed’s Dudley in particular was noted as saying that the risks of hiking rates ‘a bit early are higher than the risks of lifting off a bit late’ in comments on Reuters. On the other hand the Fed’s Fisher said that whilst there is no emphasis for June over September with regards to a move he noted that these two months get the main weight of probabilities. Meanwhile over the weekend the San Francisco Fed President Williams was quoted in the WSJ reiterating similar upbeat comments around the US and also said that he believes the unemployment rate will likely fall from 5.7% to 5.0% by the end of the year – consistent with full employment.

It was a better day for oil markets on Friday as WTI (+3.30%) and Brent (+4.21%) both closed higher – supported by the latest Baker Hughes rig count which saw the number of operating rigs falling 43 to 1,267 last week. As we mention later in the performance review, the +16% February return for Brent was in fact the first positive return month since June last year and the single largest monthly return since May 2009.

Before all this in Europe, bourses closed firmer across the region with the Stoxx 600 (+0.39%), DAX (+0.66%) and CAC (+0.83%) all finishing higher. Peripheral bond markets also firmed with 10y yields 1-5bps tighter generally. Similar maturity Bunds weakened however, closing 3.1bps wider at 0.326%. It was all eyes on the data in Europe. German inflation was the main focus for markets with the annualized print coming in firmer than expected at +0.1% yoy vs. (-0.3% expected), with the dip into deflation lasting only one month. The stronger print was evident in the monthly figure which rose +0.9% mom in February and was the largest positive monthly move since December 2004. Our colleagues in Europe noted that although a bounce back in energy and food prices helped, a recovery in core inflation was the most important contributor. They do however warn that inflation will likely stay near 0% over the next few months given the influence of energy prices and don’t rule out another temporary dip into deflation. Back to data, French consumer spending (+2.6% yoy vs. +1.8% expected) surprised to the upside whilst Italy CPI (-0.2% yoy -0.5% expected) and the German import price index (-4.4% vs. -4.6% expected) also helped support the better tone.

Just wrapping up the weekend’s news, the FT reported yesterday that Eurogroup Chairman Dijsselbloem was quoted as saying that Europe is prepared to make a first disbursement of the €7.2bn remaining in the Greece’s bailout as early as this month, but only if the two sides can agree upon reforms quickly. The comments highlight the uncertain funding position that Greece now finds itself in with conflicting reports that the government will run out of cash sometime this month. Meanwhile, in an article with German press Bild over the weekend, German finance minister Schaeuble also appeared to offer a somewhat softer stance relative to previous views saying that the current Greek government needs time but is committed to implementing the necessary reforms. Despite reiterating that Greece will not receive any aid payments until demonstrating that it meets the pledges of the bailout programme, Schaeuble said that ‘I am confident that it will put in place the necessary measures, set up a more efficient tax system and in the end honor its commitments’.

Taking a look at the week ahead, it’s a busy calendar in Europe this morning highlighted by the February advanced CPI reading for the Euro-area. As well as this, we’ve got unemployment due for the region and the final manufacturing PMI print for February. Regionally, we’ve also got the manufacturing PMI’s due in Germany, France and Italy whilst closer to home in the UK money supply and consumer credit prints will be of interest. It’s no less quiet over in the US this afternoon with the PCE deflator due along with the final manufacturing PMI print for February, construction spending and ISM manufacturing and prices paid. Turning to Tuesday, cash earnings data in Japan will be of interest in the Asia timezone before we get German retail sales, Euro-area PPI and the construction PMI for the UK. In the US on Tuesday we’ve got the ISM NY, IBD/TIPP economic optimism reading for March and vehicle sales for February to keep an eye on. We kick off Wednesday in Asia with services and composite PMI prints in China and Japan. The final services and composite PMI prints will also be the attention of the market in Europe on Wednesday when we get the February prints for the Euro-area, Germany and France as well as advanced readings in Italy and the UK. Retail sales for the Euro-area will also be of focus. Over in the US, the ADP employment print will be important particularly ahead of the payrolls reading later in the week. As well as this, the composite and services PMI’s, ISM non-manufacturing and Fed’s Beige Book will also be of focus. Turning to Thursday, we’ve got the ECB and BoE meetings to look forward to. It’ll be interesting to see if we hear of any updates on the collateral waiver for Greek bank funding in particular at the ECB. Before this in China we’ve got the annual meeting of the National People’s Congress where we may well see the government cut the growth target for the year. In the US on Thursday we’ve got nonfarm productivity, jobless claims and factory orders due. We round off the weak in Europe on Friday with Q4 GDP data out of the Euro-area with the market looking for a +0.9% yoy reading. As well as this, industrial production out of Germany will be worth keeping an eye on. The focus in the US will of course be on the February payrolls print with our US colleagues looking for a 250k print vs. a current 257k 12-month average. We also get the usual employment data that comes with payrolls as well as consumer credit.